Question

Sharp Corporation is considering making a significant long-term investment in Pristine Ltd., a young and very...

Sharp Corporation is considering making a significant long-term investment in Pristine Ltd., a young and very promising company. Sharp decides to make a smaller investment first, and if Pristine turns out to be successful, Sharp intends to make an additional investment to reach significant influence. Pristine has 200,000 shares authorized, 110,000 shares issued and 90,000 shares outstanding. On January 1, 2014, Pristine issues Sharp 10,000 shares for $400,000 in cash (so now there are 120,000 shares issued, and 100,000 shares outstanding).

Additional information:

1.    On November 1, 2014, Pristine declares a total cash dividend of $180,000. Pristine reports $225,000 net income for 2014. Its stock price on December 31, 2014 is $38.

2.    On November 1, 2015, Pristine announces a total dividend of $270,000 to be paid on January 2, 2016. Pristine reports $360,000 net income for 2015. Its stock price on December 31, 2015 is $44.

3.    On March 15, 2016, Sharp is approached by an investment fund which offers to buy all their Pristine shares for $55 per share, a 25% premium over the current stock price of $44. Sharp accepts the offer and sells the shares on that day.

Instructions: Assuming Sharp uses the fair value through net income model (FV–NI) to account for this investment:

(a)   Prepare the journal entries in Sharp’s books for the 2014 calendar year.

(b)        Prepare the journal entries in Sharp’s books for the 2016 calendar year

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